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The key risk indicators and key performance indicators can be made to work in direct collaboration with each other to facilitate business growth and excellence as both of them are two different sides of the same coin. The key risk indicators provide an early warning signal to the management regarding the impending risks involved in a particular activity, the key performance indicators provide quantifiable inputs to enhance performance and enumerate the critical success factors vital to success in an organization.

Key Risk Indicators

Businesses have become more and more widespread and diverse and aim their strategies for enhancing the long term growth prospects and success. The utility value of the KRI is proven from the fact that they are instrumental in reducing the losses that are bound to occur without the initial risk management planning and building the framework. Careful analysis of the risk indicators enable the organization to convert the same to performance inputs and link them directly with the business goals and achieve higher business distinction. Although, accurate measurement of such risks is not feasible for any organization; however careful in depth enterprise risk management (ERM) will facilitate better internal control and planning that will prepare the organization for future perils. Further, care must be taken not to rely on such plans as they do not have a proven track record and keep them only as a reference measure.

Key Performance Indicators and Balanced Scorecard

The KPI or key performance indicators can be commonly defined as involving the use of inputs designed by the organization and management to gauge the performance ratings and direct them positively towards achieving the business objectives. Whatever the means are chosen, they must be the stems of the organizational inputs from which fruits of success evolve in due course. Moreover, the KPI must facilitate achievement of organizational goals and described simply to be easily followed and executed by the workforce. Furthermore, the theory of Balanced Scorecard provides metrics to measure the business performance and KPIs are a set of metrics designed to achieve the business goals. The KPI and Balanced Scorecard do not have much difference and differ only by means of metric use; however, since the depiction of the metric is quite abstract, the management must not blindly depend on them.

Overall, the key risk indicators and key performance indicators, both are vital to an organizational planning and objective strategizing along with the critical success of a business and hence, must be accounted for in the designing the long term plans of an organization.

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Do-s:

• Efforts should be made to use quantifiable KRI.
• The methods and approaches used in the development, implementation and maintenance of KRI should be consistent.
• A long term check of the KRIs should be maintained against the specifications and standards set.
• KRIs should be in sync with the objectives and goals of the organizations.
• Relate to risk owners: KRI should work in the favor of the stake holders, as prosperity of stake holders is one of the main objectives of any business.
• KRI should be able to measure up to a range of risk that may emerge in a particular domain of its coverage.
• The KRI must be adaptive and responsive to market dynamics.

Don’ts:

• While designing a KRI, Do Not induce unnecessary complexities in the risk measure.
• Although KRI should be simple, but it should not be too narrow as this would defy the very purpose of KRI. Do not make the KRI very limited in scope.
• Don’t rely completely: Don’t rely on initial KRI completely. It should be tested time and again for improvement and changes.

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KRI Checklist

The check list below will help to find out if Key Risk Indicators were developed and implemented properly.

It is necessary to make sure you KRI are integrated in your business processes correctly. It is good idea to check your KRI against the checklist after significant changes in business processes.

• Study the specific industry verticals for appropriate risk assessment and strategic planning.
• The key risk indicators established must be in sync with the company goals and complement the key performance indicators.
• Identify the risks involved and draw a risk management plan to avert those risks.
• Periodically assess and review the risk management plan.
• Integrate the plan into the management system for appropriate reference.
• The key risk indicators established must be an integral part of the decision making process.
• Develop clear procedures for effective communication of the risks and opportunities that can meet the internal stakeholder requirements.

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Dealing with risk opportunities

In the corporate world, risks and opportunities go hand in hand as risks can sometimes prove to be the stepping stones towards an impending opportunity, and different opportunities often carry prospective risks. The effective management of risk will prevent project failures and reduces credit risk and also averts malevolent activities from occurring.

Considering risks as opportunities paves way for further growth for a business organization and increase efficiency in the process. The foremost step to be taken for managing risk and dealing with it is identifying and characterizing the risks involved and thereafter, strategizing ways to avert those risks and subsequently executing them.

Many organizations have their own risk management departments and frameworks integrated with their internal processes and enhancing their working by accelerating the continuity of such processes and derive maximum benefit. Strong commitment from the top management will facilitate the categorizing the risk areas, the timelines and requisite deliverables, allocating capital and resources for achieving goals and the subsequent review of the process.

The Enterprise Risk Management framework (ERM) in businesses involves the methodologies and procedures used by organizations to manage their risks and effectively and grab opportunities arising out of such risks. Through positive identification of risks and opportunities businesses create value for the company stakeholders that comprises of owners, customers, employees and even society at large.

Potential risks and opportunities are generally derived from the operational department of an organization, which naturally contributes to overall success rate and efficiency.  Furthermore, the probable risk involved varies as per industry verticals and involves diverse perspectives which in turn include the type of risk, the estimate and effective management.

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The development of Key Risk Indicators has enhanced the prospects of business performance significantly and its usage has extensively evolved over time. Their immense potential in facilitating the business growth and excellence has contributed to its popularity in recent times. More and more organizations are building KRIs nowadays and benefiting from their use. Let us look at some of the key steps involved in the process of developing KRIs.

Detect the Risks:

1. Identify the risk involved. The first step is to identify the risk involved in the business and to understand the root cause for the same.
2. Measure the effectiveness of identified risks indicators for the business. These can be measured by basically two tools:
   • Gap Assessment: It uses seven dimensions, (namely- measurement frequency, levels of trigger, criteria for escalation, lead or lag, ownership of metrics, availability of historical data and accuracy of the data source) which are rated 1 to 5. It helps in judging the effectiveness of KRI.
   • Design Matrix:  It is a matrix which shows the relationship between various risks indicators and their causes. It is a qualitative tool.
3. Improve risk indicators. In this step various risk indicators are tested against the tools i.e. Gap Assessment and Design Matrix. After that the not so strong risk indicators are removed from the list. The list is reduced to a maximum of five KRIs.

Analyze the Risks:

1. Validate the risk indicators and identify the trigger level. The process of validation deals with statistically analyzing the historical data of risk and the KRI. In case historical data is not available, a proxy event driver can be used. The resultant correlation between the event driver and the KRI guides in setting the trigger levels. In case, validation is not required for the data, trigger levels can be obtained on the basis of business requirements.
2. Design the Dashboard Reports. Dashboards usually use graphs, tables etc and help in the better understanding of the KRIs in particular and the entire business situation in general. It helps the management to review the actions taken and to adopt appropriate controlling measures.
3. The plan of control. It is a brief summary of all the actions and the specifications with regard to the KRI. The control plan helps the management to take up a series of predefined and appropriate steps each time a KRI is triggered in the business.

The aforementioned theory can be utilized by businesses in developing the KRIs. Either a top- down or a bottom –up approach can be used, depending on the business scenario and the prevailing situation.

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Download ready to use KRI (Key Risk Indicators) template

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The key risk indicators are parameters that effectively measure the risks involved in a business procedure and activity and provides us with a prior notification of its possible harmful consequences. More and more organizations are turning to Enterprise Risk Management (ERM) to manage their risks and provide a framework to work out their business strategies in the direction of consistent growth and excellence.

KRI Toolkit includes

• Introduction to KRI (key risk indicators)
• Building the KRI (key risk indicators)
• Ready to use KRI template (available in free PDF download)
• How to use KRI
• KRI checklist
• KRI: do-s and don’ts
• KRI vs. KPI and Balanced Scorecard
• Practical application of KRI

Reason for Usage

The Key Risk Indicators are becoming the most sought after concepts to understand and adopt by businesses as they perfectly complement the Key Performance Indicators in contributing to an organization’s growth and success and relate to the key business objectives too. The concrete identification of inputs that have the potential to hamper productivity and performance automatically relates to the inputs that facilitate performance and are positive contributors to business growth.

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As businesses expand their operations and processes become complex, the propensity of risk factors involved becomes more elaborate and necessitates careful analysis and management. Further, to elicit business performance in the long term, the need for measuring the risks in advance becomes an important procedure for management to assess the potential impact of an activity performed and the possible risks it carries. Such evaluation metrics are essential to pro-actively manage the prospective risky ventures and facilitate timely detection and take appropriate steps to prevent malfunctions. The timing plays a significant role as the sooner a risk is identified and tackled, better would be the chances to avert it and would ensure timely action and assist in long term success of the organization.

• Definition: The key risk indicators are parameters that effectively measure the risks involved in a business procedure and activity and provides us with a prior notification of its possible harmful consequences. More and more organizations are turning to Enterprise Risk Management (ERM) to manage their risks and provide a framework to work out their business strategies in the direction of consistent growth and excellence.
• Reason for Usage: The Key Risk Indicators are far becoming the most sought after concepts to understand and adopt by businesses as they perfectly complement the Key Performance Indicators in contributing to an organization’s growth and success and relate to the key business objectives too. The concrete identification of inputs that have the potential to hamper productivity and performance automatically relates to the inputs that facilitate performance and are positive contributors to business growth.

Developing an effectual risk framework is a daunting task for most businesses since the chief risk possibilities are laid out in financial terms only, and generating effective operational risk indicators in relation to these is a taxing proposition and challenging task. It is imperative to have a periodical risk assessment process working on regular basis and the management must take apposite steps to emphasize on the efficacy of the risk indicators and review it appropriately.

Communicating the risk appetite and working out the routine services and performance levels are the important utilities of key risk indicators. The implementation of the risk indicators should be done in a way that it assists in improvising the consistency levels, the relevance of their adoption and the relative transparency of the entire process. The risk indicators are positive contributors to track the loss making activities and the shaping up the factors that contributed to the losses. The basic vagueness of the actual concept makes it hard to organize and systemize the entire execution process; however standardization of the procedure by the use of commonly comprehendible language around the business activities and related risks will lead to strong development of the key risk indicators and their specification.

The ERM i.e. the concept of Enterprise Risk Management is steadfastly gaining momentum amidst the corporate honchos and business units to manage their risks and enhance their performance levels.  The age old saying that what gets measured gets managed is perfectly applicable under such scenarios and to effectively measure the risks involved in a business,  a series of steps are undertaken to build the foundation of a corporate risk management program that is critical to business performance.

Benefits of KRI

The application of Key Risk Indicators holds a promising future in the corporate world and has great potential if implemented in a methodical way with a commonly understood configuration and lingo and goes a long way in ensuring the smooth flow of business processes and activities. Organizations can reap rich dividends from adopting KRIs as the clear defining of these expresses strong commitment to risk management involving stakeholders at all levels.

Building KRI also facilitates significant risk appetite and allows accurate reporting for timely detection and action, besides meaningful comparisons across situations where risk is applicable, and further permits effective monitoring of those risks and provides framework for dealing with them.

The full description of the indicator available can easily provide an Early Warning Signal to the management and prevent impending losses and other related issues that can be detrimental to an organization’s growth and long term profitability.

The key risk indicators are immensely useful in supporting the top management decisions and actions as they effectively lay out the risky propositions and manage the groundwork vital to achievement of business objectives and enhance future prospects with their benchmarking.

Limitations

The system of organizing and managing the Key Risk Indicators is a vague concept in itself and calls for in-depth understanding and structuring for collective comprehension. The accurate measurement of the KRI is not a feasible option and not fully trusted by a business.

Any business develops various plans of actions to achieve their objectives and avert risks, however blind faith in such strategies is not a viable option as their value cannot be fully supported with concrete proofs, which makes their development not worth the effort.

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